Mark McLaughlin looks at how inheritance tax business property relief may be ‘recycled’ in a family context.
Business property relief (BPR) is an important inheritance tax (IHT) relief. It shelters the value of eligible business property from IHT at current rates of 100% or 50%. The most common categories are a business (or interest in a business) and unquoted company shares, which potentially attract BPR at 100%.
Various conditions must be satisfied for BPR to be available (e.g. regarding the type of business activity, length of ownership of the business or business interest, etc.). The requirements for an eligible BPR claim are not addressed in this article.
Spouses or civil partners
In marriages (or civil partnerships), if (for example) one spouse dies leaving shares in the family trading company eligible for BPR at 100% to the surviving (UK domiciled) spouse, this will generally result in BPR being wasted, as the legacy will normally be subject to the IHT spouse exemption.
Conversely, leaving the shares to non-exempt recipients (e.g. adult children, or a family discretionary trust) will normally enable BPR to be available.
Example 1: BPR on the first death
Peter died on 31 March 2021, having made no lifetime gifts. His death estate amounted to £2.8 million, comprising the family home (700,000), shares in Widgets Ltd (£800,000) and investments (£1.3 million).
Peter left the shares in Widgets Ltd (the family’s manufacturing company) to a discretionary trust for his UK domiciled widow Jane, his children and grandchildren. He also left investment assets of £325,000 to the trust (i.e. equal to his available nil rate band). The family home was left to Jane, together with the remaining investments of £975,000 (i.e. £1,300,000 - £325,000).
The discretionary trust received assets amounting to £1,125,000. The Widgets Ltd shares (£800,000) attracted 100% BPR. The investment assets (£325,000) left to the trust were covered by Peter’s IHT nil rate band, so IHT liability arose on the legacies to the trust.
The family home (£700,000) and remaining investment assets (£975,000) left to Jane benefited from the IHT spouse exemption.
‘Recycling’ BPR
It may sometimes be possible for BPR to be utilised for a second time on the same business property, particularly in family situations.
Example 2: More BPR
Jane (in Example 1) is a director and employee of Widgets Ltd and remained actively involved following Peter’s death.
She bought the shares in Widgets Ltd from the discretionary trustees for £800,000, which still represented their market value (Jane will be liable to stamp duty at 0.5% (i.e. £4,000)). The transaction was funded from the investments inherited from Peter, which Jane sold shortly after his death. The base cost of those assets was also uplifted to market value on Peter’s death, and only a small CGT liability arose when they were sold by Jane.
If Jane survives at least two years following her acquisition of the Widgets Ltd shares (and assuming no changes in legislation), BPR is once again available on the shares. The discretionary trust is liable to IHT (e.g. on ten-year anniversaries and capital distributions to beneficiaries), but IHT rates for such trusts are generally a maximum of 6%, as opposed to 20% (chargeable lifetime transfers) or 40% (on death) for individuals.
Practical tip
The trustees of the discretionary trust may decide to make distributions to Jane during her lifetime as a beneficiary.
